Domestic equity markets posted strong gains during the fourth quarter of 2019 with the S&P 500 Index increasing 9.07%. Market volatility was minimal in the quarter with major domestic indices continuing to reach all-time highs through December on the back of an accommodative Federal Reserve and a Phase One trade deal with China. The S&P 500 Index returned 31.49% over the course of year – the best yearly gain since 2013.
Equity performance was also strong across small- and mid-cap companies with the Russell 2000 Index and Russell Midcap Index returning 25.52% and 30.54%, respectively. Growth stocks once again outperformed their value counterparts across all market capitalizations. Except for the Real Estate sector’s -0.5% decline, all sectors were positive in the quarter. Technology continued its strong run, returning 14.4% in the quarter and 50.3% for the calendar year 2019. The Healthcare sector rebounded in the quarter returning 14.4%. High dividend paying defensive sectors like Utilities and Consumer Staples lagged the overall market as bond yields rose to become more attractive and risk-on sentiment thrived.
Equity markets outside of the U.S. posted strong gains in the fourth quarter with Emerging Markets leading the way with an 11.84% return. Chinese markets were a major driver of Emerging Market returns as positive news flow of a trade deal with the U.S. calmed investors. A decisive Conservative Party victory in Britain’s Parliamentary elections led to a strong rally in UK equity markets as investors saw a pathway forward to a final Brexit deal. Developed European markets moved higher on continued European Central Bank accommodation and hopes that major manufacturing centers were bottoming.
The Federal Open Market Committee (“FOMC”) cut interest rates by 25 basis points at their October meeting, leaving the target range for the federal funds rate at 1.50% to 1.75%. Fed Chairman Jerome Powell cited sluggish global weakness, the U.S.- China trade war, and uncertainties associated with Brexit as reasons for the additional rate cut, noting that inflation was not currently a concern. Chairman Powell also signaled this may be the final rate cut in this “mid-cycle adjustment” and stated the FOMC’s current rate stance of monetary policy was likely to remain appropriate. The yield on the 10-year Treasury rose from 1.68% to finish the quarter at 1.92%. The yield curve steepened as the FOMC’s rate cuts lowered the short end of the curve, and recessionary concerns for 2020 abated allowing longer-term rates to steadily rise.
The initial estimate of fourth quarter gross domestic product (GDP) was for 2.1% growth, bringing 2019 calendar year growth to 2.3%. Residential fixed investment, representing purchases of private residential structures and equipment, was the bright spot in the report and grew at a 5.8% pace. Personal consumption expenditures slowed but still grew by 1.8%, government spending was additive, and trade provided its biggest contribution to GDP in a decade as imports collapsed. One concern in the report was the negative contribution from business investment, which declined for the third straight quarter. Consumer confidence indices remained high but did tick down in December after a strong November reading.
The U.S. unemployment rate remained at 3.5% during the fourth quarter – its lowest level in 50 years. U.S. hiring picked up with the economy adding an average of 184,000 jobs per month during the quarter. The December Jobs Report saw continued increases in employment in the service sectors, especially education and health services, which is a trend that was present throughout the year. Average hourly wages continued to grow near a 3% rate throughout the quarter.
The year-over-year headline inflation rate increased to 2.3% during the quarter, with higher gasoline prices more than offsetting declines in used automobile prices and airline fares. During the same period, core inflation, which excludes food and energy, rose at a 2.3% rate with upward pressure in shelter and medical care services.
